Private participation in infrastructure provision?

Mr. Llanto is Vice-President of state-run Philippine Institute for Development Studies, and a Research Fellow of the Rural Development Research Consortium at the University of California in Berkeley.

The specter of crippling fiscal deficits and the inability to produce
revenues for infrastructure provision prodded the government to turn to
private participation as the efficacious solution to the acute
infrastructure lack that has turned off investors, constrained economic
growth and contributed to the lack of competitiveness of the economy.

With the passage of the Build-Operate-Transfer law in 1990 and a
subsequent amendment in 1994, the Philippines became the first country
in the ASEAN region to use private participation as a critical strategy
for infrastructure provision.

The approach was credited for solving the power crisis of the nineties
albeit with generous government assistance through comprehensive
guarantees given to the independent power producers (IPPs).
Private sector participation (PSP) was also employed in other sectors
such as transport, water distribution, etc. with some positive results
in terms of greater access to those utilities by more households.

However, today it looks like the private sector has beaten a hasty
retreat from infrastructure provision and the government facing a
staggering fiscal deficit estimated at 4.59% of GDP in 2003 is once
more in a quandary on how to address the severe inadequacy of
infrastructure.

More than 30% of the 2004 national budget is slated for debt service
(interest payments) while the rest of the budget mainly pays for
salaries and wages of bureaucrats, leaving very little elbow room for
maintenance and capital expenditures. On the other hand, the public
outcry against the controversial power purchase agreements (PPAs) with
IPPs spawned a lingering doubt over the supposed benefits of private
participation in infrastructure.

The power purchase agreements with the IPPs are being blamed for the
prohibitive cost of electric power to many households and firms. Thus,
various interest groups scandalized by the burden especially to poor
households and emboldened by frequent government intervention in the
rate-setting process, have railed against increases in tariffs in
water, electric power and transport.

Indeed, the incoming administration (post-election) faces a
debilitating fiscal deficit that hinders public provision of
infrastructure. Official development assistance is available but cannot
be effectively utilized because of budgetary constraints and
inefficient project implementation while private sector interest seems
to have waned.

There is a crisis of confidence in privatization and in public-private
partnership in infrastructure provision. For example, what was once
proudly described as the largest privatization of water distribution
through a concession agreement with local and foreign investors has
been labeled a failure by some civil society groups because of
perceptions that it has harmed the poor.

Unfortunately, the government failed to provide a cogent explanation
that consumers, especially the poor were paying much, much more for
informally purchased water than after the privatization. Sometimes, the
problem with sustaining policy reforms is that those who benefit do not
march to the streets in support of those reforms that have improved
their welfare while it seems that the ‘losers’ in the policy reform
process are easier to galvanize into a formidable opposition force.

It seems that the government has forgotten a basic thing on the road to
privatization. The benefits of privatization in terms of proceeds from
the sale of public assets or from licensing the private sector to
operate the utility have been mainly used by the government to support
its weak fiscal position. Thus, at one time, the government could even
crow about having a fiscal surplus.

On the other hand, there is a legitimate and moral case for using those
proceeds to make life a little better for the poor, for example, by
subsidizing water connections of the poor, financing rural
electrification extensions to uneconomic areas in more innovative ways.
Where there are direct and tangible demonstrations of such benefits,
there will be a groundswell of public support to government efforts and
programs.

Among other things, to restore confidence in the economy, the
government should first learn how to prioritize infrastructure
projects, improve the review of project and sector economics as well as
have more efficient policy coordination and implementation. It should
think about a better way of “compensating” those adversely affected by
the reforms, including privatization of infrastructure provision. It
should dispel doubts about the effectiveness and stability of contracts
and install credible regulatory frameworks. Unfortunately, in the rush
to privatize, the government forgot to deal with the need to have an
independent regulatory capacity, leaving regulatory institutions open
to opportunistic political intervention.

On top of the list, is the need to look for innovative public-private
provision models. It is critical to revisit the Build-Operate-Transfer
law, review its implementation and introduce a clearer framework for
market-based competition and unsolicited bids in infrastructure
projects.

It is equally important to develop the government’s capacity to assess
and manage risks in infrastructure projects. The experience with IPP
contracts drove a lesson: No government guarantee should be given to
shield private investors from commercial risks. The problem of
developing a suitable framework for managing contingent liabilities
arising from government guarantees stands out as a crucial area to
address.

Infrastructure provision is not an either government or private sector
effort; in many instances, it is both the public and private sector
complementing each other in the daunting task of providing this country
21st-century infrastructure. But it is the government and Congress that
set the tone, create the mood and stoke investor interest in having
more effective public-private partnership in the economy.